Zerodha is one of the most trustworthy and genuine stock broker companies in India, which is regulated by SEBI. It is a debt-free company and it has not been involved in any major regulation violation in the last 10 years. However, recently its users dropped Rs 10 crore in lapsed Rights Entitlement Reliance Industries Limited (RIL). While most of this investor money was lost on account of the RIL Rights Issue, some were lost in other issues as well. The customers of Zerodha have lost 10 crore rupees since May 2020 in expired Rights Entitlements. The Rights Entitlements (RE) are the shares offered to eligible shareholders in the ratio of their existing holdings. These eligible shareholders are the ones who own the share of the company. RE is a temporary credit of shares in the Demat account of the eligible shareholders which enables the shareholders to apply for the rights issue or transfer the RE to other interested investors.
It is very significant to note that getting RE shares does not mean that an investor has rights shares and the investor needs to apply for rights shares based on RE received. Then they are credited in the Demat accounts of eligible shareholders of a company going through a right issue. Alternatively, a shareholder can also transfer or sell his RE to other interested investors by participating in RE trading on the stock exchange. This month, the CEO and co-founder of Zerodha Nitin Kamath took to Twitter to inform investors that his new-age brokerage will now warn investors, who wish to apply for Rights Entitlements on their platform, of the risks involved. He wrote, “Many retail investors buy Rights Entitlements without knowing that the value of REs will be zero if they don’t apply”. “Since May 2020 our clients have lost Rs 10 crore by buying Rights entitlements & not applying. We now have a nudge to warn customers”, Kamath added.
Nitin Kamath’s company Zerodha was founded in 2010, and it is headquartered in Banglore and it has its physical presence in major Indian cities. It operates on an online discount brokerage model wherein only online trading services are offered to customers. And it is an Indian financial services company and a member of NSE, BSE, and MCX. Zerodha Broking Limited offers retail and institutional broking, mutual funds, currencies and commodities trading, and bonds as well. Technology helps Zerodha to scale and minimize the operational cost which in-turn helps them to maintain large profits despite offering low-cost trading.
The RE ensures that the investors are entitled to apply for that many numbers of shares. The eligible shareholder can similarly apply for additional rights share over and above their Rights Entitlements. The allotment of such additional rights share will be based on the issue subscription and will not be guaranteed. Shareholders who are not willing to exercise the rights ignore the RE received in their Demat account. Since May 2020, when the Reliance Industries Limited rights issue opened for subscriptions, customers of Zerodha lost Rs 10 crore in expired RE by not applying for shares. “Most of this is Reliance Industries given the size of its rights issue but it includes the amount our clients lost for all rights issues since May 2020”, Nitin Kamath told Financial Express. Reliance Industries has been a business giant for many years and it is an Indian multinational conglomerate company which is headquartered in Mumbai. Reliance owns businesses across the entire India and is engaged in energy, petrochemicals, natural resources, telecommunications, and retail.
When Reliance Industries Limited issued Rs 53000 crore rights issue in May 2020 it was the first in Indian share markets where shareholders were allowed to trade REs. Nitin Kamath told the Financial Express that Rs 10 crore that Zarodha users have so far lost includes, investors buying REs from eligible shareholders, but not applying for shares within the deadline, and eligible shareholders nether applying for the rights issues using their REs, nor selling their REs in the stock market. Currently the shareholders have lost a huge amount of money in this RE. However, with the chances of future better Right Entitlements on the exchange floor can provide an incredibly good opportunity for the eligible shareholders to get their rights at a better price.
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Reference:
- www.moneycontrol.com
- www.financialexpress.com